Exclusive: ECB may review QE options but decision could be put off until December

A vendor receives a five Euro bank note from a customer at the central market in Athens, Greece, July 8, 2015.
REUTERS/Christian Hartmann/File Photo

FRANKFURT The European Central Bank may discuss technical changes to its asset-buying scheme next week but a decision could be deferred until December when the bank will also decide whether to extend the scheme beyond March, sources familiar with the discussion said.

Compromise proposals could include relaxing, on a temporary and partial basis, a rule forcing the ECB to buy debt in proportion to the size of each euro zone economy, the sources familiar with the discussion added.

That could potentially reduce the ECB's purchase of German debt, risking renewed conflict with Berlin, which has already argued that the ECB is subsidizing indebted countries.

Other proposals may include buying a limited amount of bonds yielding less than the deposit rate, which the ECB currently rules out, and buying a bigger share of any individual bond issue, the sources added.

The ECB is looking for ways to ensure it can continue buying 80 billion euros worth of bonds every month even if it decides to extend the program beyond its current end-date in March. The asset purchase scheme was launched in March 2015 as part of efforts to revive growth and inflation in the euro zone.

But because technical changes will depend to a great degree on whether the scheme is extended, many policymakers advocate combining the two decisions, probably in December, the sources told Reuters.

"Let's not get too far ahead of ourselves," said an ECB rate-setter who tends to vote with the majority. "The technical changes are closely related to the policy change and should be made together."

CAPITAL KEY COMPROMISE?

Any technical change should not fundamentally alter the nature of program, so compromises will be needed, especially on the sensitive issue of buying debt according to each euro member country's shareholding in the bank, the so-called capital key, the sources said.

The compromise could be to allow small, one-off or temporary, needs-based deviations from the capital key so that the ECB can tweak its purchases, several sources said.

That would mean that if there is not enough German debt to buy in a given period -- because yields were too low, for example -- the ECB would be allowed to buy bonds elsewhere.

But a move to completely abandon the capital key or to shift to purchases proportional to the volumes of outstanding debt issued by euro zone countries are unlikely, the sources said.

The ECB declined to comment. The sources added that no decision has been made and board proposals have yet to be distributed.

"Abandoning the capital key completely would be very difficult. That would be a PR disaster in Germany and it would suggest we want to help indebted countries more," a governing council member said.

"But we're already deviating from the capital key so the question is just how much deviation is too much before you change the nature of the program. I think we have room left."

The ECB does not at present buy Greek and Cypriot bonds because they lack an investment grade credit rating, and it does not buy corporate debt according to a capital key.

SCARCITY

With much of the euro zone yield curve in negative territory, the ECB could run out of debt to buy next year in several markets, including Germany. The sources said that a move is not urgent, however, as real scarcity is not expected before the program is due to end in March.

Dovish members of the Governing Council argue that relaxing the capital key would not lift German yields much but would push down yields on the periphery, reducing fragmentation in the market and making the ECB's asset purchases more potent.

But the sources said Germany and its small group of allies are unlikely to accept such a proposal as the original scheme was based on no risk-sharing.

A more acceptable proposal could be to let the ECB buy some bonds yielding less than the bank's -0.4 percent deposit rate. [L8N1CH59I]

As a compromise, instead of eliminating the threshold, it could be applied to batches of bonds, based on maturity or the time of purchases.

Buying more expensive debt would do less for inflation and make the scarcity of bonds worse, however, the sources added.

One source said the December package could also include a modification of the ECB's forward guidance to include a reference to the bank's balance sheet.

More exotic options, like purchases of non-performing loans, advocated by countries such as Italy, would not be seriously considered, the sources said, while a rate cut is also not being seriously discussed.

Increasing the purchase limit for some bonds from 33 percent of an issue towards 50 percent is also a viable proposal, the sources added.

(Editing by Catherine Evans)

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